How to Plan Intercorporate Dividends (Part IV) — 7 Steps (2026)

Intercorporate dividends between Canadian corporations are generally tax-free under s.112, but Part IV of the Income Tax Act imposes a refundable 38.33% tax on portfolio dividends and dividends from non-connected corporations. Owner-managers moving cash between an Opco, Holdco, and investment corporation must model Part IV, safe-income, and Section 55(2) exposure before every material dividend. This 7-step guide walks the 2026 process Bader uses.

1. Step 1: Determine the connected-corporation relationship

   Under s.186(4), one corporation is “connected” to another if (a) the recipient controls the payer, OR (b) the recipient owns more than 10% of the voting shares and more than 10% of the FMV of all issued shares of the payer. Connected corporations receive intercorporate dividends free of Part IV tax to the extent the payer receives a Part IV RDTOH refund on payment. Confirm the connected test at each dividend date.

2. Step 2: Compute the Part IV tax exposure

   Part IV tax equals 38.33% × the portion of dividends received from non-connected Canadian corporations (portfolio dividends), PLUS the recipient’s pro-rata share of any RDTOH refund realized by the connected payer on paying the dividend. Part IV tax is refundable when the recipient pays a taxable dividend at a rate of $1 refund per $2.61 of dividend paid. Model the net cash after refund cycle.

3. Step 3: Calculate safe-income on hand for the payer

   Safe-income on hand (SIOH) is the portion of the payer’s retained earnings that has been fully taxed at the corporate level and represents “hard” earnings available for tax-free intercorporate dividend under s.112. Compute SIOH by tracking taxable income minus tax paid minus non-deductible items, plus tax-free receipts (life insurance proceeds under CDA), from acquisition date to dividend date. This is a working paper — not a general ledger balance — and must be refreshed for every material dividend.

4. Step 4: Assess Section 55(2) exposure

   Section 55(2) can recharacterize a tax-free intercorporate dividend as a capital gain if the dividend does not have SIOH backing AND one of the s.55(2.1)(b) purpose tests is met (reduction of capital gain, significant reduction of FMV of any share, or significant increase in cost of any property). The 2015 amendments broadened s.55(2) significantly — almost any intercorporate dividend without matching SIOH is now at risk. Document SIOH before every dividend.

5. Step 5: Structure the dividend to preserve GRIP/LRIP and CDA balances

   GRIP (general rate income pool) allows eligible dividend designation, delivering lower personal tax when the dividend eventually flows to individuals. LRIP (low rate income pool) requires non-eligible dividend designation. The Capital Dividend Account (CDA) is a tax-free pool of realized capital gains 50% portion + life insurance proceeds; capital dividends flow tax-free to Canadian residents. Model the payer’s GRIP, LRIP, and CDA at dividend date to elect the correct designation.

6. Step 6: File the T2 return with correct Part IV, RDTOH, and dividend schedules

   Complete Schedule 3 (Dividends Received, Taxable Dividends Paid, and Part IV Tax Calculation), Schedule 53 (General Rate Income Pool Calculation), Schedule 89 (Request for Capital Dividend Election), and T2054 (Capital Dividend Election if paying a capital dividend). File electronically via EFILE. Cross-check the RDTOH refund flow: paying a dividend refunds $1 per $2.61 of taxable dividend paid (approximately 38.33% of the taxable dividend, capped by RDTOH balance).

7. Step 7: Retain intercorporate dividend documentation for CRA review

   Retain per dividend: (a) SIOH working paper at dividend date, (b) directors resolution declaring the dividend, (c) GRIP/LRIP/CDA balance schedules, (d) Schedule 3 with Part IV calculation, (e) T2054 with attached agreement if capital dividend, and (f) bank record showing dividend payment. Intercorporate dividends are a common CRA reassessment area — clean documentation is often the difference between a s.55(2) sustain and a full recharacterization.

Frequently Asked Questions

What is Part IV tax and when does it apply?

Part IV is a 38.33% refundable tax on portfolio dividends (dividends from non-connected corporations) and on the recipient’s pro-rata share of RDTOH refunds received by connected payers. It is refundable at $1 per $2.61 of taxable dividend paid by the recipient. Applies only to corporations, not individuals.

What is the difference between connected and non-connected corporations?

Connected: recipient controls the payer OR owns more than 10% voting and more than 10% FMV of all issued shares. Non-connected: below the 10%/10% threshold. Portfolio dividends from non-connected corporations trigger immediate Part IV tax; connected-corporation dividends trigger Part IV only to the extent the payer receives an RDTOH refund on payment.

What is safe-income on hand and why does Section 55(2) care?

SIOH is the portion of a corporation’s retained earnings that has been taxed and is “hard” income available to support tax-free intercorporate dividends. Under s.55(2), if a dividend exceeds SIOH and one of the purpose tests applies, CRA can recharacterize the excess as a capital gain — costing 25-30% tax that a properly SIOH-backed dividend would have avoided.

What is the Capital Dividend Account?

CDA is a tax-free pool of a private corporation’s realized capital gains (50% inclusion portion) plus life insurance proceeds net of ACB plus certain other items. Capital dividends flow tax-free to Canadian resident shareholders. Elect on Form T2054 before payment.

How is RDTOH refunded?

RDTOH is refunded to the corporation as it pays taxable dividends, at the rate of $1 refund per $2.61 of dividend paid, capped by the RDTOH balance. Track two pools since 2019: eligible RDTOH (from eligible dividends) and non-eligible RDTOH.

Authoritative Sources

• CRA — Income Tax Folio S3-F2-C1 Capital Gains
• CRA — Schedule 3 Dividends Received
• Insight Accounting CPA — Subsection 55(2) Canada 2026

Expanded technical guidance

Common pitfalls in Part IV intercorporate dividend planning

• Part IV tax miscalculation on connected corps. Dividends from a “connected” corporation (owning 10%+ voting AND FMV of the payer) attract Part IV tax at 38 1/3% only to the extent of the payer’s dividend refund. If payer has no dividend refund, receiver’s Part IV = nil.
• s. 55(2) anti-avoidance surprise. Dividends between corporations can be recharacterized as capital gains if the dividend exceeds safe income. Post-2015 s. 55 amendments materially expanded this rule. Compute safe income before every material intercorporate dividend.
• eRDTOH vs nRDTOH split ignored. Post-2019, dividend refund pools split into eRDTOH (eligible refund at 38 1/3% on eligible dividends paid) and nRDTOH (non-eligible refund at 38 1/3% on non-eligible dividends). Track separately for T2 Schedule 3 accuracy.

Forms, filings, and deadlines

Report intercorporate dividends on T2 Schedule 3 (Dividends Received, Taxable Dividends Paid, and Part IV Tax Calculation). Track dividend refund pools on T2 Schedule 53 (General Rate Income Pool — GRIP), Schedule 54 (Low Rate Income Pool — LRIP), and Schedule 3 for RDTOH pools (eRDTOH + nRDTOH). Reference: ITA s. 112 (inter-corporate deduction), s. 129 (dividend refund), s. 186 (Part IV tax), s. 55(2) (dividend recharacterization). CRA guidance: Income Tax Folio S3-F2-C1 (Capital Gains — Adjusted Cost Base), IT-269R4 (Part IV Tax on Taxable Dividends Received by a Private Corporation).

Worked example — Holdco receiving eligible dividend from connected Opco

Opco (100% owned by Holdco) pays $100,000 eligible dividend from its GRIP. Opco’s dividend refund = 38 1/3% of $100K = $38,333 refund. Holdco’s Part IV tax = $38,333 (matched to Opco’s refund). Holdco records dividend income under s. 82(1), deducts under s. 112(1) → net corporate tax nil, then pays Part IV of $38,333 → adds $38,333 to Holdco’s eRDTOH. When Holdco later pays $100K eligible dividend to individual shareholder, gets $38,333 refund. Full loop preserves the tax-free intercorporate flow.

Worked example — s. 55(2) trap on excess dividend

Opco’s safe income = $200K. Holdco (parent) receives $500K dividend from Opco to strip cash. Under s. 55(2), $300K excess over safe income is recharacterized as a capital gain to Holdco. Holdco taxed on $300K × 50% inclusion rate × 26.5% corporate rate = $39,750 unexpected corporate tax + Part IV mechanics disrupted. Solution: cap the dividend at safe income each period; supplement with alternative planning (s. 55(3) exemptions, or wind-up under s. 88).

Worked example — portfolio investment (unconnected)

Corp A owns 3% of Corp B (not connected). Corp B pays $10K dividend to Corp A. Because Corp A is not connected, Part IV tax = 38 1/3% × $10K = $3,833 regardless of Corp B’s refund position. This is the standard portfolio-dividend Part IV tax.

Related Insight resources

Intercorporate dividend planning under Part IV commonly triggers the s. 55(2) anti-avoidance rules — read the pillar on subsection 55(2) intercorporate dividends for the 2026 safe-income calculation framework. If the dividend is being paid to preserve the SBD after passive income growth, pair this guide with how to preserve the CCPC small business deduction and the Small Business Deduction Calculator.